Question

Big Fish Inc. is acquiring Little Fish Ltd. Big Fish's share price is $10 and Little Fish's share price is $2. Both firms have 1 million shares outstanding. Big Fish expects a discounted synergistic value of $1 million from the merging of operations of the two firms. If Big Fish issues $2.2 million worth of shares to Little Fish's shareholders, what is the NPV of the acquisition? Round your answer to the nearest dollar.

• $144,262

• $1,344,262

• $823,524

• $655,738 is correct but why

Answer 1

Both firm's outstanding shares = 1,000,000

Share price of Big Fish = $10

Value of Big Fish (before acquistion) = $10,000,000

Share price of Little Fish (before acquistion ) = $2,000,000

Big Fish acquired by issuing shares to shareholder of Little Fish woth = $2,200,000

Net Acquisition cost(C) = 2,200,000 - 2,000,000 = $200,000

Value of Big Fish ( after acquisition ) = 10,000,000 + 2,200,000 = $12,200,000

Holding percentage of existing shareholder in Bigh Fish (WB) = 10,000,000/12,200,000 = 81.967213%

Discounted Synergistic value(S) = $1,000,000

Total Benefits from acquisition = S-C

Total Benefits from acquisition = 1,000,000 – 200,000

Total Benefits from acquisition = $800,000

Net Present value (i.e net value addition to existing shareholder's share value) of this Acquistion:

NPV = Total Benefits from acquisition *WB

NPV = 800,000 * 0.81967213

NPV = $655,738

Hope it will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.